How Good is Your Trade Execution?

I read in your blogs that your preferred underlying IC instrument is RUT. How often do you get good execution prices with RUT spreads? It's hard for me to get the "mid-price". Do you have any suggestions on execution prices?



Hi Keiser,

Short answer: I don't know how good the executions are.  This is primarily due to the fact that I trade options that are not very liquid.  They are low volume options, and I have no comparative data.

Details: My broker (IB) advertises that they achieve excellent fills, and offer evidence.  I choose to believe them.  However, I'm sure it only applies to single option (no spreads) that have a lot of public order flow.  My trades are almost certainly being made with market makers, or some other professional trader, and I can only get a good fill when they are willing to provide it.

I never try to get the midpoint on my credit spreads or iron condors, and I am happy to get 10 cents worse than mid.  I will go as far as 15 or 20 cents worse than midpoint – if I 'need' the spread for risk modification or when I want to exit to reduce risk.  When collecting the profit, I have more patience.

When trading with the market makers, I don't know how we can ever know what they are thinking or how they value the specific trade that we are trying to make. 

Sometimes when selling vega (for example), the market makers are short vega and are willing to pay up to get some positive vega.  When that happens we could get midpoint – or even better – for selling positions with positive vega.

If trading 100-lots, then those market makers are going to have some incentive to examine our orders and look for an appropriate hedge that allows them to take the trade.

When customers trade 1- or 5-lots, then it may not be worthwhile for the MMs to spend any time with our bid or offer.  My guess is that their computers are set with parameters that scan spreads.  In other words, their computers and the algorithms they set, make the trade decisions.  If that is true, we can never judge how good the fill is – but it will never be 'good.'

You could enter the same order with several brokers and see which one delivers the best execution.  I suspect that's a waste of time, but it is research and you may discover a path that saves significant money – if you have the time and patience to make that attempt.

My only useful suggestion is to know just what you are willing to pay (or collect) for the trade and not to go beyond that limit.  I understand that 'knowing' the limit is difficult – especially when we have no idea of the true bid/ask spread for our trade.  One of the serious defects with electronic trading is that customers do not get to see the real (inside) market.  We only see the published markets, and those are useless.

Side opinion:  When we enter bids and offers without a clear view of the real market, then we are becoming de facto market makers.  We lay our cards on the table and others can take or reject our trade. 

Thanks.  Good questions.


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13 Responses to How Good is Your Trade Execution?

  1. Jesse 12/31/2010 at 6:37 AM #

    sorry, off topic:
    “People keep looking outside themselves for happiness, but it’s inside.”
    Happy New Year 2011 to All!

  2. Mark Wolfinger 12/31/2010 at 8:17 AM #

    Thanks for sharing.
    Yes, it’s inside. When you have the ability to take the time to recognize the truthfulness of that statement.

  3. Fran 12/31/2010 at 8:59 AM #

    Hi Mark,
    why do you trade low volume options?
    I only trade spy options because these are the most reliable options when things don’t work so good (let’s remember may flash crash) and they allow the best executions when things are working fine.
    I’ve checked with real trades that these best executions offset the fees increase of trading SPY options instead ES or SPX’s ones.
    This is a very important topic to think about.
    Happy New Year Mark and OFR friends.

  4. Mark Wolfinger 12/31/2010 at 10:11 AM #

    You are correct. When trading it’s always better to trade options with liquidity. We all know how important that is when you want to make an adjustment or exit a trade.
    However, I will NOT trade 30 day iron condors just to have higher liquidity. I open my positions 13 weeks prior to expiration and there is very low volume in those options. At least that’s true for RUT options.
    I will take a look at 3-month SPY options,but have avoided them because commissions are 10x as costly.
    I prefer 13-week, low liquidity than front-month, high liquidity. It’s just a comfort zone trade-off.
    PS I am trying to reach you via e-mail.

  5. Fran 12/31/2010 at 10:36 AM #

    now SPY april expiration is good enought. Take a look, but I have no doubt about it.
    PS You’ve got mail lol

  6. Jason Prefixed 12/31/2010 at 5:43 PM #

    Speaking of liquidity…
    This whole week I had been trying to open a RUT IC 710/720/860/870 as a single order with no luck. My last attempt was a limit of $2.30. I finally cancelled the order and created a 710/720 spread for $1.35. It sold almost immediately, I then entered 860/870 spread for .95 and again it sold within a minute or two. End result: I got my $2.30 fill but I had to leg in. Do you have any idea why my IC didn’t get filled but two separate verticals did?
    Happy New Year,

  7. sandeep 12/31/2010 at 7:23 PM #

    Would you be willing to elaborate a little more about this comment from your post?:
    “One of the serious defects with electronic trading is that customers do not get to see the real (inside) market. We only see the published markets, and those are useless.”
    From our recent discussions you are aware of my frustration in trying to trade SPX, and maybe this is my problem. I have assumed that the wide bid/ask spread that I see when I look at the SPX options is the “true” market. I have clicked the button on my platform that allows one to see the prices quoted on the exchange, and as one would expect the best bid and offer on the exchange are what we see on the option price chain.
    I have made one roundtrip trade in SPX, and that was done at the mid, and I used limit orders at the mid for those trades. One of the main questions I have is what would happen if I made those same trades but placed market orders – would I be filled at about the same price I got with my limit order (the “true” market, or would I have been filled at the terrible prices reflected by the huge bid/ask spread (the “useless” market that we retail traders see)? If it is the case that the bid/ask that we the retail investor is not the true spread, and that a market order would likely get filled at 10, or 15 or 20 cents away from the mid, then that makes a huge difference. In SPY for example, I can always place a market order and know that I will get an instant fill within only a few cents of the mid (at the natural).
    As we discussed earlier, today I looked at buying a SPY 127 calendar and compared it with the corresponding SPX 1270 calendar. The SPX price at the mid was better than the SPY price, and would have been even if I bid up to 25 cents higher for the SPX spread. I didn’t take the trade but it was a good lesson.
    As always appreciate any comments you may have,Happy New Year,

  8. Mark Wolfinger 01/01/2011 at 10:28 AM #

    All I can do is make a guess.
    My explanation is that you traded with two different market makers. One liked the call spread and the other liked the puts. But no one liked the combination of spreads.
    It’s more likely that the combination of the $2.30 price, coupled with your trade size (even though I have no idea what that size is) was not enough for any single trader to ‘want’ the trade and over-ride his/her computer algorithm.
    Again, it’s my guess, but it may be that the traders find it’s not worth their time/effort to bother with many of the orders submitted by us, the retail trader. If it’s not ‘good enough’ to be automatically grabbed by their software, then it’s not good enough to trade.
    Happy New Year

  9. Mark Wolfinger 01/01/2011 at 10:37 AM #

    The wide market is not the true market. It is the market designed to rip-off idiots who enter market orders.
    If you were able to trade at the mid, then you already KNOW that the visible market is not the true market. What further evidence could you need?
    If you enter a market order, the computer is ‘instructed’ to get a fill ‘this instant.’ It does not seek quotes, it does not seek market improvement, it just buys and sells. It absolutely has no chance to wait and see if anyone will bite at the mid. That’s why you must use limit orders.
    The fills would be terrible with market orders.
    With SPY, the markets are tight and a market order cannot be hurt too badly. Don’t forget that 2 cents away from the mid with SPY is exactly the same as 20 cents away with SPX. The real difference is the extra commission cost of trading SPY.
    These things must be discussed with your broker, but I am not sure I would trust the customer service rep to know the correct answer.

  10. sandeep 01/01/2011 at 7:50 PM #

    Thanks Mark, that clears things up quite a bit for me. The obvious follow up question is how does a retail investor figure out what the true market is? From my experience and your comments, I am presuming that the only way to do this is to test the market with limit orders and see what happens. I would also presume that if a retail investor wanted to trade say 10 contracts in SPX or RUT, it would be best to leg into it with a bid for maybe 2 contracts at first, and then based on whether that fills quickly or doesn’t fill at all use that information to help determine bids for the rest of the order.

  11. Mark Wolfinger 01/01/2011 at 9:39 PM #

    The best way to get the true market is to call your broker and have them go to the trading floor and ask for a quote.
    These days, they will probably laugh at you and refuse to do it, unless you trade enough size to make it worth their while.
    Here’s the TRUTH. We have extremely low commissions. We have instant fills. We can enter orders via computer rather than telephone. We have fantastic access to information. It’s utopia for the retail trader. UTOPIA. Not so many years ago we had NONE of this. We paid heavy commissions to trade and had no idea what the market was (no computers), unless we sent a broker to ask.
    So what if you cannot discover the true market without entering an order? That’s the cost of having all these benefits.
    The 2-lot idea is foolish and you would learn nothing. If you are trading an active series, and I assume that you would be, then random public orders to buy and sell appear frequently. Your 2-lot could easily be taken out by one of those and you would never know if a market maker traded with you or whether it was an excellent fill – one that cannot be repeated. Or perhaps the futures suddenly changed direction and a MM took your order. It’s a waste of time to pay so much attention to this.
    My advice – consider this the cost of doing business. I remember trading options when the cost was $120 for a 10-lot spread. Today, you pay $14. You are so much better off, even if you have to pay another nickel for your trade.
    More advice: You are a beginner. Spend your time learning something useful.

  12. Frank 01/02/2011 at 7:36 PM #

    Hi Mark, thank you for maintaining this blog your comments have been very helpful to me.
    I have been trading condors since April by using SPY at 10 to 12 weeks from expiration, selling the short strike at a delta of .2, targeting collecting a premium of $1.10+,results in long position at 4 points from the sold position(i.e. sell a 128 call buy a 132 call). I make partial adjustments if delta reaches .35 by reducing the spread to two positions, reducing the position or converting to a calendar or even a vertical. I have been making money but at times I feel as if I maybe making too many adjustments(two to four before closing). I try to close out of the positions at 4 weeks to expiration. I have found the $1 premium collected allows me make adjustments yet still have a profit. My usually postion size is 50 to 100 contracts per leg but at this time believe to 4 point spread range maybe too risky.
    I am considering reducing my exposure from a spread of 4 to one or two. I am using the thinkorswim site and have found if I stay with a .2 delta for the short strike with a two point spread then premium would be about .70 cents, to go to a .3 delta at a one point spread would collect about .50 cents or at a .4 delta a premium of .7 cents. I am also considering multiple condors with same expiration month such as selling SPY call at 130(short)/131(long) and 132(short)/133(long) then if SPY rises to hit 130 roll the 130 and 133 and sell the 131/132 as a vertical or even move the 133 to 129 then the postions become a vertical. I am most comfortable trading SPY, I tried using SPX once and got burned by waiting to long to close the trade and not as liquid as SPY.
    Mark any suggestions you can provide or other factors I should consider would be appreciated.

  13. Mark Wolfinger 01/02/2011 at 7:53 PM #

    Happy new year Frank,
    I like the questions and the fact that you are seriously considering several alternatives.
    There are two problems for me. The answer you seek requires a great amount of detail. I simply don’t have the time to devote to that.
    But more importantly, I would be responding from my personal perspective and you must truly trade something that fits within your comfort zone.
    In response to the questions, I want to offer some advice – that I trust will help you find the answers.
    Look for a blog post based on your set of questions sometime this week.